Sabco® Investment's Monthly Market Report - September, 2022

Sabco® Investment's Monthly Market Report - September, 2022

The past month witnessed a series of significant trends in financial markets. Bond yields rose, the dollar strengthened, and equity markets experienced declines. The global wave of monetary tightening continued unabated. The fiscal package introduced by the new UK government was met with a negative response from financial markets.

In September, equity markets worldwide faced a sharp decline. Several factors contributed to this weakness, including the tightening of monetary policy, the rise in bond yields, increased concerns about a potential recession, and a deteriorating earnings outlook. Geopolitical risks, such as the partial mobilization in Russia, the annexation of Ukrainian provinces, and the sabotage of the Nord Stream pipeline, remained in focus and added to the market volatility.

The US stock market had its worst monthly performance since March 2020 and underperformed the European stock market when measured in dollar terms. However, due to the rise in the dollar, the performance of both markets was relatively similar when measured in euro terms. Exchange rates played a significant role in the performance of stock markets across regions. Asian stock markets, particularly those in China, experienced losses, while Latin American stock markets held up relatively better.

Stocks sensitive to higher interest rates, including the technology sector and the real estate sector, performed weaker than the overall market average in Europe and the US. The impact of a weaker economy and higher inflation also affected the real estate sector. Value stocks, such as financials and cyclical sectors, performed better than the market average but still faced negative performance.

In September, inflation data exceeded expectations, leading to a surge in bond yields. Eurozone inflation reached 10%, a milestone not seen before. US 10-year yields rose to just under 4%, up from 3.1% at the beginning of the month. German 10-year rates also climbed above 2.2%, the highest level since 2012.

Italian government bond spreads experienced a slight increase ahead of the parliamentary elections at the end of September. The right-wing coalition led by the far-right Fratelli d'Italia emerged as the winner, signalling an intention to maintain fiscal discipline. However, uncertainties remained about the continuation of structural reforms in the Italian economy.

The new Truss government's fiscal package in the UK caused market turmoil. The package, which involved tax cuts and increased borrowing, resulted in a loss of confidence in the government and a wave of bond selling. As a result, the 10-year yield surged to 4.6% during the month, up from just over 2% in early August. The Bank of England responded to the market volatility by announcing its intention to purchase long bonds to prevent financial instability. Bond yields eventually declined to 4.1% by the end of the month, still significantly higher than the previous month.

September witnessed a record number of interest rate hikes by central banks worldwide. Major central banks, including the United States, Canada, Australia, the eurozone, the United Kingdom, Switzerland, Norway, and Sweden, raised their policy rates. The pace of interest rate hikes remained high, with the Swedish central bank raising its policy rate by 100 basis points in a single move.

The European Central Bank implemented a historic 75 basis points interest rate hike and confirmed its intention to continue raising rates at an accelerated pace to reach its inflation target. Another 75 basis points rate hike was expected in October.

The US Federal Reserve increased its key rate by 0.75% to 3% to 3.25%. The Fed projected further rate increases, with a 75 basis points hike anticipated in November and a 50 basis points increase in December. The median forecast for the end of 2023 indicated a rate of 4.6%, suggesting an additional 25 basis points rate hike in early 2024. Opinions among Fed members differed on the necessity of future interest rate cuts.

In a surprising move, the Swiss central bank raised interest rates by 50 basis points in mid-June and followed it with another 75 basis points rate hike in late September, surpassing expectations once again.

The dollar strengthened significantly, reaching levels not seen in decades against various currencies. It surpassed parity against the euro, reached its highest level against the Japanese yen since 1998, its highest level against the British pound since 1985, and its highest level against the Chinese renminbi since 2008. The strengthening of the dollar was primarily driven by the relatively better economic situation in the US and diverging monetary policies.

The Japanese government intervened in the foreign exchange market to halt the yen's decline against the dollar. The yen had fallen by nearly 25% against the US currency since the beginning of the year. Intervention was triggered when the yen reached 145 per dollar, a level not seen since 1998.

The Chinese renminbi also experienced a decline, falling below 7 renminbi per dollar, resulting in a loss of over 12% since the beginning of the year. The Chinese central bank did not directly intervene in the foreign exchange market but introduced measures to make short positions against the currency more expensive, indicating preparations for potential intervention.

The Norwegian krone depreciated by 6.9% against the euro in September. Norway, which initiated a rate hike cycle last year, raised its policy rate by 50 basis points to 2.25% in September but announced a more gradual approach to future increases. The decline in oil prices also contributed to the weakening of the Norwegian krone.

The British pound experienced significant volatility in September due to the fiscal package announced by the new government. The pound depreciated by over 10% against the dollar, reaching 1.03 during the month. However, the currency partially recovered following interventions by the central bank in the bond market, limiting the overall monthly loss.

Brent oil prices dropped below $90 per barrel in September, reaching the lowest level since February. However, OPEC+ unexpectedly announced a production cut, reversing the previous month's increase of 100,000 barrels per day. Another production cut of over 1 million barrels per day, around 1% of global daily production, was expected in early October to maintain the desired price level despite anticipated demand decline. European gas prices experienced a sharp decline, falling well below 200 euros per megawatt hour from a peak of 340 per megawatt hour at the end of August. The gas market faced temporary disruptions due to the complete shutdown of deliveries through the Nord Stream 1 pipeline at the beginning of the month and suspected pipeline sabotage at the end of September. However, the replenishment of gas stocks for the winter remained on track.

Industrial commodities, including copper, continued to decline in price, reflecting the slowdown in economic activity. China's weakening property market weighed on copper demand, as China consumes approximately half of the world's copper production.

Gold prices also faced downward pressure. The rise in US real interest rates, which indicates the opportunity cost of holding gold, and the appreciation of the dollar contributed to the decline in gold prices in September, continuing the trend observed in previous months.